Stock Market Indices as Predictors

The Dow Jones recently surpassed its all-time high and has contined to climb, and the various other market indices are also near historic highs… and yet unemployment is still hovering just under eight percent; the real estate market in much of the United States is still languishing; economic growth is sluggish, to say the least; hiring hasn’t picked up much; there’s still been an inflation of percent over the past four years; and interest rates are at all-time lows [which is good for borrowing, and lousy for saving].

So why is the stock market roaring to new highs?

Because for anyone who is trying to save for the future there’s nowhere else to put the money without almost immediately losing some of its value. If you put the money in a bank or under the mattress, it will lose almost two percent of its value every year… and for someone who might be trying to build up savings for a child’s college education or retirement, that’s not a pleasant thought. Investing in bonds is even worse, because with interest rates as low as they are, bond values can only hold steady, if inflation remains low, or decrease in value drastically if inflation picks up. Real estate is still depressed, and investing there is anything but flexible, since it’s hard to find buyers without taking a loss in the short-term, and it’s likely to be years before many markets recover. But… many stocks do pay dividends, and the stock market has shown a remarkable recovery since 2008… so much so that many investment professionals worry that many stocks are now overpriced, but people keep buying.

Am I saying that the stock market will crash?

I’m not about to go out on that limb, not while the federal government is pouring billions of dollars into the various money and equity markets through quantitative easing (essentially a practice of buying financial assets to inject money into the economy and maintain the prices of those monetary assets) and other indirect efforts. So far, because of the comparatively depressed state of the economy, all that federal funding has not generated inflation, but it has given many professional money and fund managers the sense that the Federal Reserve will not permit any significant loss of value in those financial assets.

The question is just how long the Fed can keep doing this before the economy recovers enough for inflation to start increasing… and what will happen then? Will the Fed be able to time the phase-out of QE so that we don’t have runaway inflation? Or are we in a permanently depressed post-technological, high automation economy that will always require such monetary stimulation? Or… has so much money been poured into the economy that a future runaway inflation is almost impossible to avoid?

As some readers may know, I was trained as an economist, and worked as one for a time, and I do follow financial trends fairly closely. So do many others, many of them far more skilled than I am, but whether many of them will admit it or not, we all have great concerns about the long-term implications of this policy. The problem, of course, is that without the Fed’s intervention, we’d still be mired in what would have turned into a second Great Depression – but then, if the Congress hadn’t totally deregulated the financial sector, we might not have been in such a huge mess in the first place. In any case, what’s done is done, and we have to deal, as we can, with what lies ahead.

First, that means recognizing that the various stock market indicators are far more indicative of the fact that the other “investment” opportunities are currently only opportunities, in general, to lose money, although there are always some good opportunities in any sector, and that the equities market is the only place in the world where large sums of money can be invested with any hope of a positive rate of return… at least, for now. But the market indices do not indicate robust economic health, and are, in some respects, more of an indication of desperation on the part of investors.

And that concerns me… especially since I – and many others – don’t see any viable alternatives, almost a damned if you do and damned if you don’t situation… and one which the politicians are studiously ignoring. But then, that’s what politicians do best.

—L. E. Modesitt, Jr.: March 15th, 2013

12 thoughts on “Stock Market Indices as Predictors”

Not only is the stock market at an all time high so are profits for many companies. In addition, executive pay has also skyrocketed. This coupled with the current tax structure, which does not really encourage businesses to reinvest, has pulling more and more money out of the economy and concentrated it into a smaller and smaller group of people. Businesses are focusing on the short term bottom line to please shareholders and so cutting costs anyway they can which cuts jobs here in the US. It is no wonder we do not have the job growth we need. We need changes in the tax structure so as to create American jobs, unfortunately, any of those changes have been blocked by the House.

Deregulation alone didn’t cause the problem. But combined with government pressure to make loans to people that wouldn’t have qualified for them if their demographic under-representation weren’t being regarded as more serious than their inability to repay, and further exacerbated by banks that figured they could always sell them before they went bad, it was a time-bomb waiting to happen.

All politicians of either party that supported easing of loan qualification requirements should have been tried and convicted for conspiracy to commit fraud (a massive Ponzi scheme, in effect). Even if they didn’t benefit monetarily, they pandered to their parasitic base for the sake of prolonging their ability to abuse their office, which is to my way of thinking far more corrupt than merely pocketing a few million, and did a LOT more damage.

If something isn’t actuarially sound, it isn’t sound; whether that’s bogus loans or Medicare and Social Security with benefits not reduced to match intake, it ought to be a crime, and progressives ought to be rotting in jail by the thousands. Not just for confiscating money and trashing the economy, but for all the limitations on liberty due to the conditions imposed as an attempt to make their unsustainable scams appear workable.

ALL bad things that happen to people are just one of the costs of liberty (which includes the right to do things that are merely _personally_ self-destructive), which if it’s worth soldiers dying for, is also worth recognizing that it would take tyranny to prevent every corporate crook from taking advantage, or every madman from getting his hands on a gun. Only those actions which can be taken with the absolute least impact on liberty for the greatest return in security should even be considered, and any attempt by a politician to pursue anything more should be punishable with a lifetime suspension from holding office or receiving any government benefit.

Some statements by their very nature need to be challenged, unfortunately, there are times when those who make said statements are so locked into their own belief structure conversation becomes unproductive. I felt this was one of those times.

He was passionate in his delivery but to the best of my knowledge, he is absolutely correct that a major element of the housing meltdown was the easing of home loan requirements which had its impetus from social considerations. I would be interested in where you think he is wrong in this or any of the fact based statements he made.

I based my statement on more than just one reply. In any case it was not the loans themselves that created the “meltdown”. There was more than one thing but the major cause was the creation of fake wealth using worthless securities based on the bad loans that was the major cause of the “meltdown”.

NPR’s Planet Money segment had a great story about how the DOW is useless – Value vs number of shares doesn’t correlate – so small changes in certain stocks change the average more than the same change in others.

The various S&P averages are better (more reflective of true market value) – and the foreign exchanges use even a larger pool of stocks to develop their averages.

Bob, true but you can’t have a fire without fuel and relaxing loan requirements and allowing an enormous amount of ‘bad’ loans, provided that fuel. Had the loan requirements remained reasonably high, there would not have been the opportunity that so many took advantage of.

What I have read has indicated the problem was not caused by the government policies that encouraged home ownership. Of course, it is not surprising that there are many who choose not to believe that given it does not fit into the “government is the root of all evil” philosophy that many embrace. It seems inordinately hard for some to accept that the unbridled focused greed of private industry can lead to anything but rosy results and “happily ever afters”.

There is not a single easy answer to that question and I am not an economist, however, here is my take. Over the years since Ronald Reagan’s “reform” of the income tax structure businesses have had lower and lower taxes without the requirement that they reinvest in themselves. Along with this is the drastic increase in executive pay This savings increase the supply of money available for things like leveraged buyouts. Next, add to this a weakening of financial regulations along with administrations who are not committed to enforcing the remaining ones. The above sets the stage; we have a house filled with gasoline and newspapers populated by unsupervised children.

The matches were provided by a large number of bad loans some of which were encouraged by the government the majority of which were not. This, of course, includes the fraudulent and predatory loans that seem to be in style during the period leading to the meltdown. Enter the derivatives. The creation of securities backed by bad loans and then used to create more “wealth” was the striking of the match.